Employee Stock Option Plan
Employee Stock Option Plan (ESOP) refers to the employee benefits scheme under which the employees are allowed to purchase the shares of their company. Most of the Indian and multinational companies use ESOPs as a compensation tool. The company encourages the employees to acquire firm ownership by offering the shares at a below-market rate in order to increase their involvement in the scheme. In many cases, the companies in India also offer the stocks as remuneration up to a specific percentage to employees. The compelling reasons for companies to implement ESOPs include wealth creators for its employees and retention. It also provides a measure of employee ownership in a high growth environment.
ESOP is essentially an incentive, granted to an employee, director or officer to buy or subscribe to the shares of the company at a pre-determined price in the future. In this way, grantees are offered equity compensation instead of / in addition to the remuneration. The benefit of ESOPs is that it allows grantees to have a stake in the company which directly results in greater loyalty and motivation while aligning the incentives of various stakeholders.
Why are ESOPs formed?
Companies usually form ESOP to facilitate succession planning in a closely held company by allowing their employees to buy stocks.
- Companies establish ESOPs as trust funds.
- ESOP shares are a part of the employee’s remuneration.
- The fact that they are a part of the employee’s salary and as the employee owns a part of the company in the form of its shares, employees focus on performing well and wholeheartedly for the company.
- This is beneficial from both the employee as well as the employer’s growth point of view.
- In simple words, ESOP refers to the employee’s ownership in the company through a share purchase.
Permanent employees, directors and officers are eligible to receive an option under an ESOP scheme. However, the following individuals are not eligible to participate in the scheme:
- An independent director
- An employee who is a promoter or belongs to the promoter group, and
- A director who directly or indirectly holds more than 10% of outstanding equity shares.
We offer a range of ESOP services, including the following.
- Valuation of options
- ESOP review
- Employee communication service
- ESOP Accounting and Disclosure in the annual report service